Alternative Minimum Tax (AMT) - Quickfinder Pages:   12-14 – 12-15

Ø What is the Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax is a parallel tax system to the regular tax system.  The AMT is calculated using a different set of tax rules than those used for regular tax.  Under the AMT rules, some deductions taken for regular tax are not allowed (or are limited).  Also, certain income and expenses are recognized under different rules for AMT. 

If the AMT calculation results in a higher tax than regular income tax, the difference is added to regular income tax on Form 1040.  In effect, the taxpayer is liable for either the AMT or regular income tax, whichever is higher.

Ø How did the TCJA affect AMT?

1. Higher exemption levels and higher phase-out levels for the exemption

Normally the very highest income households don't get to take advantage of the exemption levels, at least not in full. But the new law greatly expands how many of them can.  The amount of income automatically exempt from the AMT calculation has been increased to $109,400 for joint filers, up from $84,500; and to $70,300 for individual filers, up from $54,300.  These exemptions start to be phased out once the taxpayer has a certain amount of income.  The phase-out levels were raised to $1 million for joint filers, up from $160,900; and to $500,000 for individuals, up from $120,700.  So a lot of households making between $200,000 and $1 million will now get to take full advantage of the exemption levels, whereas before they could not.

2. Fewer tax breaks under the regular tax code

The AMT is usually triggered for filers when they claim a lot of exemptions, credits and deductions that are aren't allowed under AMT rules.  But the new tax law eliminates a lot of those breaks, such as personal exemptions and miscellaneous itemized deductions subject to the 2% AGI floor, and it has limited the value of others, such as the state and local tax deduction. 

To avoid AMT in future years -

1. Make sure your state tax withholding isn't higher than your expected payment. State tax payments aren't deductible under the AMT.

2. Pay your property taxes only when they're due. Don't prepay your next installment by the end of the year.

3. Sell exercised incentive stock options in the same year you exercise them. If you exercise the options, but don't sell, the value of the exercised options becomes income for AMT purposes

   
   

Ø How is the AMT calculated?

AMT is calculated by first taking your AGI for taxpayers who do not itemize, or AGI minus itemized deductions for taxpayers claiming itemized deductions.  The next step is for taxpayers to add or subtract certain adjustments and preference items.  Next, taxpayers will apply any applicable AMT exemption and then calculate the appropriate tax. 

Ø What are the AMT rates and exemption amounts?

Ø Who is most likely to be affected by the AMT?

Higher income earners and/or people who exercise Incentive Stock Options in a given year.

Ø Is municipal bond income subject to the AMT?

Interest from private activity municipal bonds is exempt from regular federal tax but must be included in income for AMT purposes.

Ø Does capital gain income increase my exposure to the AMT?

Incurring a large capital gain in a given year may increase your exposure to AMT because you are adding to your taxable income which may reduce or eliminate the AMT exemption.  Long Term capital gains still receive preferential tax treatment under AMT and are only taxed at 0, 15, or 20% depending on taxable income.

Ø How does incentive stock option (ISO) exercise affect my AMT situation?

When an Incentive Stock Option is exercised the spread between the exercise price and FMV of stock is not considered income under regular tax but it is taxable income under AMT.  This situation creates a dual basis in the stock, under regular tax your basis is the strike price and for AMT your basis is the FMV at time of exercise.  Because of this, the taxpayer will receive an AMT credit to use in future years when they are not subject to AMT.

Ø What is the AMT tax credit?

The minimum tax credit is available if the taxpayer paid AMT generated by deferral items in a prior year.  Generally the MTC can be used to the extent that regular tax exceeds the tentative AMT tax.  If the taxpayer remains in an AMT situation or their AMT is very close to their regular tax liability than they might not reap the benefits of the credit.  The credit is calculated on Form 8801.

AMT Credit: https://www.irs.gov/pub/irs-pdf/f8801.pdf

Stock Options and AMT: https://www.nceo.org/articles/stock-options-alternative-minimum-tax-amt

IRS Form 6251: https://www.irs.gov/pub/irs-pdf/f6251.pdf

Itemized Deductions: http://www.irs.gov/pub/irs-pdf/i1040sca.pdf